In the exercise, you need to calculate both the underapplied or overapplied manufacturing overhead and assess its impact on the gross margin. Here are the calculations:

1. Calculate the underapplied or overapplied manufacturing overhead.

Predetermined Overhead Rate: $18.20 per direct labor-hour.

Estimated Direct Labor-Hours: 12,000 hours.

Actual Direct Labor-Hours: 11,500 hours.

Total Estimated Manufacturing Overhead: $\text{Estimated Overhead} = \text{Direct Labor-Hours} \times \text{Overhead Rate} = 12,000 \times 18.20 = \$218,400$

Actual Manufacturing Overhead Incurred: $215,000.

Applied Overhead for Actual Hours: $\text{Applied Overhead} = 11,500 \times 18.20 = \$209,300$

Underapplied or Overapplied Overhead: $\text{Overhead Variance} = \text{Actual Overhead} - \text{Applied Overhead} = \$215,000 - \$209,300 = \$5,700$ Since the actual overhead is greater than the applied, it is underapplied by $5,700.

2. Impact on Gross Margin When Overhead is Closed to Cost of Goods Sold

When underapplied overhead is closed to the cost of goods sold (COGS), it increases the COGS by the amount of the underapplied overhead.

Increase in COGS: $5,700.

This means that the gross margin will decrease by the amount of the underapplied overhead, as higher COGS reduce the margin between the selling price and the cost of goods sold.

Would you like a deeper explanation on any of these points, or do you have any other questions?

Related Questions

1. How would the situation differ if the overhead was overapplied?
2. What factors could lead to underapplied or overapplied manufacturing overhead?
3. How could Osborn Manufacturing adjust their overhead application to be more accurate?
4. How does underapplied or overapplied overhead affect financial statements?
5. What are the implications of closing the underapplied overhead to COGS on tax liabilities?

Tip

Regularly reviewing and adjusting the predetermined overhead rate based on actual activity can help prevent significant variances and improve costing accuracy.